Err on the side of optimism in the case of Molycorp

Molycorp has been trading at levels close to its yearly lows. Its next Fiscal Quarterly announcement for the trimester ending in June is not due until August 8 and the there has been a surge of negative attention on the company. Analysis and prospective shareholders ask whether Molycorp is “cheap enough to buy” yet as Molycorp has fallen 40% for the year to date. Yet, in the past two quarters, Molycorp has defied analysts’ expectations by considerable margins. For the Quarter ending in December 2012, and reported in March 2013, analysts had predicted a loss of USD$ 0.27/share. In fact, the Company reported gains of 0.45/share. Similarly, analysts overestimated the loss for the First quarter 2013, expecting a loss of USD$ 0.46/share, when in fact the announced loss was USD$ 0.15/share.

The extent of the discrepancies between expectations and actual results should act as a warning both to those who are overly bearish and those who are overly bullish on Molycorp. The negative sentiment has been fueled over the past few years by the leadership of former CEO Mark Smith, who led the Company until late last year. He over-promised on Molycorp’s ability to develop and the Mountain Pass mine on schedule in order to reach the planned rare-earth oxide production rates at the end of 2012 and 2013. The new CEO, Constantine Karyannopoulos has learned from this and he has used decidedly more realistic tones, even if as noted in the past quarterly announcements production rates have increased and 2013 has already proven to be a transitional year for the Company. The Mountain Pass facility should still be able to achieve full commercial production in the latter half of 2013. Even global demand for rare earths should reach a greater balance between supply and demand.

The main problem with Molycorp’s struggling shares, in fact, is far more related to the general rare earths market situation than it owes to any Company peculiarity. And the reality is that in late May and June rare earth prices plummeted. The slight recovery or turnaround that was witnessed in May did not last. The turnaround had been driven by strong demand from Japan and from Japan’s strong market recovery; but it did not take long for a price correction to set and commodities, rare earths included, have suffered. There was another slight surge, or rather a reluctant stability, when Between March and April as Chinese exports to Japan had risen sharply – and this despite their bilateral dispute over sovereignty of the Senkaku Islands. There also remains the prospect of .a change in the distribution of rare earths at the expense of China, which would benefit the Australian producer Lynas (ASX: LYC) and Molycorp, which remain poised for market share growth, should demand increase.

The trouble is that demand projections are very difficult to get right in the continuing topsy-turvy markets. Molycorp’s slump reflects a slump in rare earths themselves. Even China has lost control of the price. This has happened because such companies as Lynas Corp and Molycorp have come on line and because the market situation has become ever more erratic. Lynas, which managed to reach a stable production state after numerous legal disputes with environmental activists, has planned to limit production because of lower metal prices and thus reducing costs. Taking advantage of the United States’ desire to reduce dependence on Chinese exports, Molycorp wants to screw up its production to 20,000 tons by the end of the year, which would correspond to about one-sixth of the world’s supply.

That’s the good news. To U.S. end users, moreover, Molycorp’s products could even be cheaper by 50% than similar offers from China. In Molycorp’s favor, moreover, as China shields the strategically important mining companies from foreign investors, it makes a stronger case for not relying on Chinese supplies more values. Nevertheless, the surge in rare earth prices in 2011 was prompted by China’s trade restrictions. The Chinese have relaxed their export conditions again, which coupled with the global economic downturn has affected the prices of rare earths. Yet, Molycorp and rare earths still have room to become exciting again. Rare earths have lost none of their usefulness; if anything, they have become even more necessary and have been unjustly neglected. Perhaps, then, it is better to err on the side of optimism in the case of Molycorp, especially as the investment risks are currently priced low.

[…] by 7% to 107,000 tons. If this sounds familiar, it is because ProEdgeWire suggested as much in an article published exactly two weeks ago, when hints of Molycorp’s current rally, and the relevant […]